A Quick Guide to FRS 105

Have the March 2018 tweaks to FRS 105 achieved much for small UK business regarding simpler reporting standards? We would argue that FRS 105 is conceptually flawed, but at least it’ll make government servers marginally lighter as a consequence of abridged reports.

Intentions Behind the FRS 105 and Notes to Financial Statements

You can read the whole nine yards of the ‘Financial Reporting Standard applicable to the Micro-Entities Regime’ at this link. However, suffice to say the authors’ overriding objective was ‘to enable users of accounts to receive high-quality understandable financial reporting proportionate to the size and complexity of the entity and user information needs.’

The standard, first introduced in 2015 but now amended, aims to simplify business reporting by cutting down on the number of notes to financial statements.

It requires all qualifying businesses to publish:

Income Statements (previously profit and loss accounts); and

Statements of Financial Position (previously balance sheets).

The structure and content of the notes at the foot of the statement of financial position are now as follows:

In the Case of Micro-Entities: Off-balance sheet arrangements, employee numbers, and financial commitments, guarantees, and contingencies (all as prescribed in The Limited Liability Partnerships (Application of the Companies Act 2006) Regulations 2009).

In the Case of LLPs Qualifying as Micro-Entities: Off-balance sheet arrangements, employee numbers, and financial commitments, guarantees, and contingencies (all as prescribed in The Limited Liability Partnerships Regulations 2006).

Definition and Extent of Micro-Entities for Purposes of FRS 105

A small business qualifies to be a micro entity provided it operates within at least two of the following thresholds:

£632,000 annual turnover (this is adjusted for less or more than 12 months);

A Balance Sheet value of £316,000;

An average number of ten employees.

This qualifying situation must apply for two consecutive years unless the company is newly-formed.

The March 2018 Amendments to the FRS 105 Reporting Standard

The most significant changes involved extending the scope of the standard to micro-entities in the Republic of Ireland. These may now use the standard for accounting periods starting on or after 1 January 2017, although the disclosures are more comprehensive.

The impact on UK-based micro-entities is softer, although these new disclosure requirements apply to accounting periods commencing on or after 1 January 2017 (i.e. from 31 December 2017 year-ends onwards).

Information about off-Balance Sheet arrangements as required by section 410A of the Act; and

Information about employee numbers as required by section 411 of the Act.

Micro-entity financial statements may only be presumed to be true and fair when this information appears at the foot of their statements of financial position.

Practical Limitations of FRS 105 Facing UK Micro-Entities

The Financial Reporting Standard applicable to the Micro-Entities Regime effectively takes its users outside conventional accounting standards. The world of finance and business beyond it still gears around accounting requirements for larger companies. The FRS 105 notes to the statement of financial position may leave glaring holes in third-party expectations. These limitations include:

Making it harder to get credit because lenders have less information to go on;

Making it harder for collaborating customers and suppliers to do due diligence.

What’s Best for Companies to Do in This Position?

FRS 105 is a concession to micro-entities hoping to simplify administration. However, they don’t have to accept the offer. They have the right to ratchet up their standards to the more advanced Reporting Standard FRS 102.

The irony is micro-entities mostly process the required information for the additional notes while preparing statements for FRS 105, here are a couple of examples:

Shareholders of micro-entities require a much more detailed breakdown of Capital & Reserves than just the total required for FRS 105 compliance, and at the very least, they need a breakdown that includes retained earnings (P&L reserves) to determine the eligibility of proposed dividends.

The Profit and Loss account is essential for calculating the company’s tax liability and is vital for business decision-making; especially over any discretionary spend.

Hence our open question remains whether FRS 105 achieves much in the way of simplifying micro-entity administration.

Implementing FRS 102 requires more detailed information, and also involves additional accounting principles but can help with obtaining credit and if you have nothing to hide will demonstrate more clearly that your business is healthy.

Red Flag Alert and FRS 105

In an environment where many companies are using FRS 105 making decisions on credit terms and managing credit risk is harder. Our algorithms are built to make sound judgments with less information, so in a time of lower transparency, our credit checking software is more valuable than ever.

For a free consultation to assess how Red Flag Alert can help you make better credit risk decisions, please get in touch with Richard West on richard.west@redflagalert.com or 0344 412 6699.

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